xiaohua

Trump on the campaign trail: Trump claimed that China suppressed its currency, the renminbi, to make its exports more competitive with US goods. Trump likened this to “raping” the US”. He repeatedlyG promised to label China a currency manipulator on his first day in office.

Trump in the White House:

Here is one more example on Trump changing his mind.

Before the White House:

After the White House:

Now, do you see a pattern? Are they Trump’s lies or it was just game American politicians play?

Oh, no. I forgot what Trump said about his respect of Putin and his love of Russia.

Unless the Islamic terrorists make a big and direct hit to a city or cities on American soil in recent weeks, which will negatively impact U.S. economy, the Federal Reserve’s Yellen will raise the federal funds rate in a process called normalization. When it happens, it will be the first time in almost 10 years since the short-term interest rate last went up. But who is counting?

The short-term interest rates have been hovering around zero percent since the 2008 financial crisis. Millions upon millions of people suffered since the financial crisis and the suffering is still developing. Of course, some people profited from it and profited mightily.

American presidents, both houses of the U.S. Congress, government regulators, including the Feds, and the greedy Wall Street bankers were directly responsible for this disaster. People’s lives changed over night. Layoffs numbered in the millions. Foreclosures were everywhere: from Las Vegas, to Phoenix, to Houston, to Central Plains, to Virginia and to Boston. These people owed more on their mortgages than what he houses were worth on the market. Many people who got to keep their houses lost equities which took years to build. Personal wealth, 401(k), pensions, stocks and bonds, took a huge hit and many people are still waiting for it to recover to the pre-crisis level. Thanks to the Feds’s action to keep interest rate at near zero level since 2009, savers had to deal with 7 years of near zero interest income from their CDs and money market funds. Trillions of dollars were lost

During the financial crisis, many officers of the failed and survived Wall Street companies were rewarded for their bad judgement using tax money. But, up to now, none of the people who were directly responsible for the loss of people’s wealth and their jobs have been punished for their crimes.

Yet, some people profited after the initial shock of the financial crisis. People who have stocks enjoyed a very good run on the value of their stock holdings. People who have investment capitals were able to purchase properties at bargain basement prices and enjoyed a decent appreciation since the depth of recession.

Then there was the middle class. For practical purpose, the size of the middle class in the U.S. has shrunk and many who used to belong to this social class sank below poverty line, forced to take a low paying job, had to work multiple jobs just to keep their family fed and bills paid.

And here we have the Feds’s Yellen who kept padding herself on the back while telling us what a great job she has done for us since taking her job as the head of the Fed in February 2014. When she eventually raises the federal funds rate and bring it to a “normal” level, her monetary policy going forward will be in direct conflict to those of the ECB, British central bank and Bank of Tokyo.

The result is further confusion in the world financial markets and a risk of instability in many emerging countries. U.S. dollar will strengthen which will put downward pressure on emerging market currencies. Some companies in emerging countries may not be able to pay their debts denominated in the U.S. dollar and equity markets will suffer. In essence, Yellen will put up a time bomb at the feet of the Bond and currency markets, mess up the exchange rates for Russia and many emerging countries in Asia, Africa and South America. Volatility will return to the equity markets and we probably can expect a period of low return for a long time.

If you happened to hear Grandma Yellen’s news conference last time after Fed’s FOMC meeting a couple of monts ago, you know she’s a light weight lamb among the Inflation wolfs.

Her answers gave the audiences the feeling that everything is peachy and there is nothing to worry about. Economy is humming along even though it barely moved above inflation. She also insisted that inflation is nothing to worry about because the Fed is on top of everything. She’s the one who will provide forward guidance to lead the bond and stock markets all over.the worl. She is the one who will calm the financial market when things may go wrong. Rate increase is months away. Taper will do the trick now. She is on top of everything and there is nothing you need to worry about.

She is also data depedent. She just can’t tell you anything without this morning’s data.

Here was what she said when someone asked her if she’s confident on the economy: “Well when you say confident I suppose the answer is no, because there’s uncertainty.”

Hmm…, give me a break.

I’ll cut her some slack because she’s new. But I just don’t trust her with the stock market and my retirent funds.

Yellen said during her press conference that May 2014 inflation rate of 2.1% as represented by CPI was nothing but “noisy.”

Well, so be it even though she had previously suggested that the Fed’s inflation target is 2%.

Well, we know that she is caught between an inflation bubble and the rock hard landing of the asset prices all over the world. Think about it: She can’t talk about inflation because she still has three runs of QE reduction in the amount of $35 billion to do. If she admitted that May inflation data is not a “noise,” she will have to abandon Fed’s QE program right away and talk about raising the Fed’s Fund rate sooner than the mid-2105 time frame expected by the market.

The result will be a 20+% correction in asset prices which will be a more serious disaster than the one happened on May 24, 2013 caused by Bernanke’s interest rate comment.

Since 2% inflation to Grandma Yellen is nothing but noise and since she still needs your risk-on investments in stocks and fixed assets to generate the proverbial trickle down effects, she continued and suggested that the stock market was not expensive based on Fed’s model.

Hmmm…, what model? Was it a Fed’s secret model developed by Ivy League PhDs or former Nobel-prize winners? She didn’t elaborate and nobody asked for clarification. I can tell you it was just P/E ratio of the stock market as compared to its historical values or treasury yields. Nothing fancy at all.

Since Grandma Yellen will take her time to remove QE from the market and since she has committed to ease the market into a gentle landing by her forward guidance, she’ll be forced by inflation surprises at the time when she is least prepared.

Just be prepared for the Black Swan because the market will not be able to take a 350,000+ job report or a few excellent first time unemployment data in the next four to six months.

Syria civil war. Israel and Palestine conflict. Ukraine crisis. ISIS’s declaration of a new Islam state. These events are disturbing but they will have minimum effects on asset prices.

To the financial world, inflation is a more dangerous beast. Yellen has ignored it for now. She has to be careful going forward because after her unimpressive performance at her last press conference the market is unease at her ability already.

A beacon of light above the entrance of a building with menecing clouds gathering in the sky in the background.
The building is the Federal Reserve building in Washington DC. The beacon of light gives out hope of chiarman Benanke or Yellen leading the US economy out of the recession into a bright future.

Benanke created QEs but they barely kept the US economy creeping along at ~2.2%. He knew his QEs made inequality in the US worse and he wanted to get taper started while he was still in the office.

Lo and behold, the moment he started taper in December 2013, the job market in November 2013 tanked: 74,000 new jobs vs. 200,000 expected. December’s number isn’t much better: 113,000 vs. 185,000. January 2014 saw 175,000 new job but still much lower than what is needed to absorb new entrants into the economy.

So what’s going on here? Do we have a recovery or do we not?

No wonder the beacon of light is’t very bright. The US economy is in the dark just like the cloud behind the building. The one who’s supposed to lead the economy out of the dark couldn’t see very far out either.

Read this from Yellon when she was pressed in the Q&E session to put a date on when the short rate will rise after QE ends:

“I — I, you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends — what the FOMC statement is saying is it depends what conditions are like at the time.”

In plain English:

“Yes, it depends and I don’t know. What else do you want? Give me a break.”

It’s kind of blind leading the blind. And we are left in the dark to guess what’s going to happen next. For the emerging markets, I am sorry, you are on your own. The US federal Reserve only cares about what happens in the US. You countries can take care of your own problems: raise interest rate to 10+%, devalue your currencies, cut your federal budgets, reduce pension benefits, what ever. That’s your problem. Not mine.

That’s was Bernanke’s position. It will be Yellen’s too.

That’s simply not fair. The US government through its crony Wall Street too-big-to-fail investment banking firms and too-big-to-prosecute bank CEOs created the financial crisis in the first place. The Great Recession was instigated by the United States and QEs followed. Now QEs’ unintended consequences begin to surface and the US washes its hands and leave other nations to face the consequence on their own.

4/20/1981 – 9/17/1990

1/1/1990 – 7/1/2013

The conclusions stated in 1962 – 1983 blog stand. The question now is what will happen with the current rate increase. The difference this time is Bernanke is messing up the Bond and stock markets big time.

When the economy eventually turns the corner, the Bond market will give out early warning shots and the stock market will response one way or the other.

Well, don’t check in with Bernanke because he is just as in the dark as everyone else. He was very clear and precise as to when and what to do in May. But then he changed his mind the next day and said that he was wrong the day before. Starting today, he’d have to see the data before deciding what to do next.

So what’s it, Bernanke? To taper or not to taper?

The Fed made a mistake and they learned their lessons. We’ll just have to wait until the Fed makes the announcement on a Friday evening after market closes. It might be a long weekend.

Once taper starts, the Bond market and the stock market will be like “从此后 惊涛骇浪 烟也蒙蒙 雨也蒙蒙。” 虽然还达不到天崩地裂的程度但是小心一点还是应该的。

Watch what Bernanke does not what he says。Also pay attention to who will take over Bernanke’s position. Trial bloom will come out prior to the Jackson Hole meeting. The one who attends the Jackson meeting in Bernanke’s place could be the one. The Bond market will have a better idea.

I believe Bernanke told Obama in early April that, after 8 years, he has had enough and he’ll step down after his term expires on January 31, 2014.

Obama probably told Bernanke that he should skip the Jackson Hole meeting hence Bernanke’s announcement that he’ll not attend the Jackson Hole meeting; first time it has happened in 25 years.

I am going to stick my neck out and say that the new chairman won’t be any of the top two front runners: Yellen or Summers. Of course, this is purely speculation on my part. But I know that the one who is recommended by Krugman will be bad for the United States. We don’t need another liberal or Keynesian at the Fed. We already have Obama which is bad enough as is.

Of course, I don’t know who the new chairman going to be. We need someone with private sector experience who also has a firm grip on monetary policy and macro economics.

The FBI is doing the background check and rumors will come out soon after the drama at Jackson Hole dies down in late August.